Rising Expenses, Uber Loss to Hurt Twilio (TWLO) Q4 Earnings

Twilio Inc.TWLO is slated to release fourth-quarter 2017 results on Feb 13. The question lingering in investors’ minds is whether this cloud communications services provider will be able to post a positive earnings surprise in the to-be-reported quarter. Notably, the company’s results have surpassed the Zacks Consensus Estimate thrice and came in line in the other, over the trailing four quarters. It has an average positive earnings surprise of 49.4%. So, let’s see how things are shaping up prior to this announcement.

What to Expect?

Analysts polled by Zacks project revenues of roughly $103.5 million, up 26.3% from the year-ago quarter. However, for earnings, they expect the company to report a loss of 6 cents as against a breakeven earnings reported in the year-ago quarter.

We believe Twilio’s top line will benefit from its continued focus on rolling out products, global expansion and go-to-market sales strategies which will more than offset the loss of revenues from troubles with one of its major customer. However, the company’s bottom-line results are might be adversely affected by escalating expenses.

Let’s delve deeper and find out how the aforementioned factor will impact Twilio’s fourth-quarter results.

Twilio has been striving to gain more and more enterprise customers, as they bring in more stable revenues for the long term. The company mainly generates sales through its online model, but in order to grab more market share, it has increased its investment on building traditional sales team.

Furthermore, Twilio has rolled out a plan for enterprise customers with more compliance, administrative and security features — Enterprise Plan — which, we believe, will drive its enterprise customer growth. Notably, its strategy has started paying off well as reflected from the fact that the company signed its first enterprise license agreement during third-quarter 2017, that too of nearly eight figures.

The strategy is likely to benefit the company in gaining more enterprise customers in the quarter under review. Additionally, as more and more companies are making a switch to the cloud, Twilio looks poised to ride the growth trend over the long run.

Key Customer Loss to Partially Impede Revenue Growth Rate

Twilio made a terrific run after its stock market debut in June 2016 wherein the company’s share price tripled in the next three months. However, the momentum didn’t last long as its biggest customer, Uber, decided to move away from the platform, which turned investors cautious.

Notably, Uber uses Twilio for a variety of used cases, such as driver and rider communication, driver marketing and several others. Till 2016, Uber used Twilio’s platforms in most of its geographical operations.

However, since second-quarter 2017, Uber is “optimizing by used case and by geography” and is planning to "move communications for some use cases in-app." This means that Uber is now trying to operate its messaging services internally.

This, in turn, has marred Twilio’s overall financial performance. Uber’s contribution to Twilio’s revenues has now declined to approximately 5% in the third quarter from roughly 17% in fourth-quarter 2016.

Looking at this, we expect the company to witness even lower revenue contribution from Uber, thereby slightly impacting the overall revenue growth rate for the quarter to be reported.

Furthermore, heightening competitive threats from the recently listed Bandwidth Inc. BAND might impede Twilio’s revenue growth rate. Though the rival is still very small in comparison, the like of clients it has added in the recent past makes us believe it can grab market share from Twilio. Notably, Bandwidth has around 850 customers against Twilio’s 40,000, but its client list includes names like GoDaddy Inc. GDDY, Google Voice, and Skype.

Rising Expenses to Hurt Profitability

We remain concerned about the company’s declining gross margins which worsened during the third quarter, touching its lowest level in the last three years. The company’s gross margins have been negatively impacted by shift in international traffic mix and reduced revenue contribution from Uber. During the third-quarter earnings conference call, management had hinted that the issues will continue to hurt its gross margin in near future.

Furthermore, the company’s aggressive sales strategy is driving revenues, but at the cost of its profitability. It should be noted that Twilio’s aggressive investments toward sales activities resulted in a year-over-year increase of over two-folds in third-quarter operating loss.

We expect the situation to remain intact in the fourth quarter, thereby thwarting its fourth-quarter bottom-line results.

What the Zacks Model Unveils?

Our proven model does not conclusively show that Twilio is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Twilio carries a Zacks Rank #3, which increases the predictive power of ESP. However, an Earnings ESP of -2.13%, makes surprise prediction difficult.

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